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Life Insurers Face Future Rate Pain; The coronavirus may pose a bigger challenge to life insurers through markets rather than mortalityLife Insurers Face Future Rate Pain; The coronavirus may pose a bigger challenge to life insurers through markets rather than mortalityDemos, Telis.Wall Street Journal (Online); New York, N.Y.Life insurers aren't facing any imminent holes in their balance sheets. But the further-out future should still worry investors. Most life insurers in their first-quarter reports gave a benchmark loss estimate for 100,000 U.S. deaths from Covid-19. The current recorded U.S. death toll is about 94,000, according to data compiled by Johns Hopkins University. None of the big insurers said that the 100,000-death scenario would generate levels of loss in their policy portfolios that would require them to raise additional capital. Even at double that level of mortality, this would still largely be the case, in part because mortality risk is typically only one part of insurers' business, estimates Erik Bass of Autonomous Research. Typically many life insurers use a modern version of the 1918 "Spanish flu" pandemic, or roughly a half-million U.S. deaths, as a stress test . Moody's Investors Service estimates that at the high end of its base scenario of Covid-19 mortality—about 330,000 U.S. deaths—related gross death-benefit claims across U.S. life insurers could be about $40 billion. Net of reserves and reinsurance, the losses would represent under 10% of statutory capital for most insurers, Moody's estimated, and that doesn't account for tax benefits, other cash flows, longevity offsets such as less long-term-care payouts, or better health outcomes among the insured. In addition, lower new sales would hurt earnings but also mean less capital allocated to new policies, freeing up more cash, Mr. Bass of Autonomous noted. The ultimate death toll and attendant losses from the coronavirus are, of course, still unknown. But for now, investors across the market appear to be pouncing on hopeful trends and signals—and life insurers have been big beneficiaries. Lincoln National and Principal Financial Group are two of the biggest gainers in the past month among S&P 500 financial stocks, both up more than 20% since April 22. Brighthouse Financial is up about 40% over that time. Major U.S. life insurers' average price-to-book ratio has recovered from a low of 0.35 times to about 0.5 times, according to FactSet figures. That's a substantial discount to a year-earlier average around 1 times. But caution is still warranted. If the cost of a lower mortality rate is an economy that remains mostly in lockdown, then insurers' investment books will continue to be under pressure, both from another market meltdown and just from generally depressed returns. Hedges have protected insurers from market hits to annuity policies, and only a small portion of their fixed-income portfolios have rolled over at lower rates. But the longer rates stay depressed, the bigger the pressure on their long-term investment returns. At present most life insurers are still projecting benchmark 10-year Treasury rates to return to levels north of 3% over 10 years, according to figures compiled by UBS analyst Brian Meredith. But a long and fitful recovery would stress those assumptions. Mr. Meredith wrote in a note that "further revisions will need to be made if interest rates remain around current levels in the short-term." Life insurers also have other economic exposures over the course of this cycle, such as to credit losses and alternative investment performance, that are still in flux. So although life insurers' core strength doesn't now appear to be at risk, they are also not out of the woods, either. At a 50% discount to book, the sector is definitely not expensive. But there is still too much uncertainty to yet call it a bargain. |
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